Making sense (and, sometimes, nonsense) out of Current News, Issues, Politics

Thursday, October 9, 2008

Can a Recession Be Averted?

While Democrats (especially Barack Obama) have been saying that we have been in a recession since the middle of last year, a key member of the National Bureau of Economic Research (NBER) said that they are not quite ready to declare the "R" word (See Full Story). The NBER is conflicted in actually making the recession call because the fundamentals of our economy are still strong and our economy is still showing growth while the overall amount of job losses appear to be consistent with a recession. Even on the job side of the equation, things are muddy and inconsistent. For example, the new unemployment insurance claims report of today fell by 20,000 claimants. This isn't consistent with an economy that is in or falling into a recession (See Full Story). Economist after economist keep making referrence to the resiliency of our economy and how it is seems to be so "fundamentally" strong. (If you recall Barack Obama hammered John McCain on saying that the fundamentals of the economy were still strong.)

While this credit crisis has the look and feel of a recession, the facts have yet to truly bear this out. As I have said before in this blog, we really can't say that we are in a recession until we see two consecutive quarters of economic contraction. My guess is that this month's reporting of the 3rd Quarter's Gross Domestic Product (GDP) will still show some limited growth and defer the countdown of two contracted quarters until the 4th Quarter GDP report in January. I think a recession will be clearly known and declarable with the 1st Quarter GDP report of April of 2009.

The real question remains as to whether or not all this money that is being thrown at the credit crisis will actually avert a recession. The stock market activity over the last two weeks says no and investors seem to be bracing for the worst.

The problem with our economy, at this stage, is that two factors in the Law of Supply and Demand are being affected. We have too much stuff ( the "Supply") and manufacturers are being forced to slow down production. This results in job layoffs. At the same time, the consumer (the "Demand") is weak because of those job layoffs and because of the fear about our economy and the inability to buy things on credit.

For any economy to correct itself or pull itself out of the recession, the consumer must lead. In other words, demand (consumer and business spending) must be the primary driver that causes the "supply" (manufactured goods and services) to increase to meet that demand.

To woo consumers and businesses into a spending mode, you can not keep reminding them of how bleak things are; a picture that the Democrats and Barack Obama constantly paint in speech after speech and on TV news interviews. The consumer's willingness to buy stuff is predicated on their "confidence" in the economy and in their ability to keep their job. While talk is said to be cheap, it can be very costly at a time like this; and, I find it totally irresponsible to keep talking down this economy so someone can win an election. We could, right now, be at a tipping point that could easily push us into a long term recession or even a depression. All the money in the world won't help things unless the consumer is willing to buy. A doctor will tell you that attitude is an essential factor in fighting any disease. The same is true with our economy.